Fair Valuation of Participating Life Insurance Contracts with Jump Risk

23 Pages Posted: 5 Apr 2007 Last revised: 26 Dec 2010

See all articles by Olivier Le Courtois

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Francois Quittard-Pinon

EMLYON Business School

Date Written: October 31, 2006

Abstract

The purpose of this article is to value participating life insurance contracts when the linked portfolio is modeled by a jump-diffusion. More precisely this process has a Brownian component and a compound Poisson one. The jump size is given by a double exponential distribution, so that jumps can be upward as well as downward. More specifically here, the bankruptcy risk of the insurance is considered. Thus market and credit risks are taken into account. Thanks to this modeling, quasi-closed-form formulas are obtained for pricing the life insurance contract at fair value. This allows us to investigate the impact of strategic parameters as well as structural ones, as is shown in the numerical part of this paper. The effects of early default are particularly emphasized.

Keywords: Participating Life Insurance Policies, Kou Processes, Jump-Diffusion, Early Default, Fair Value

JEL Classification: G13, G22

Suggested Citation

Le Courtois, Olivier Arnaud and Quittard-Pinon, Francois, Fair Valuation of Participating Life Insurance Contracts with Jump Risk (October 31, 2006). Geneva Risk and Insurance Review, Vol 33, No. 2, p.106-136, 2008 . Available at SSRN: https://ssrn.com/abstract=978422

Olivier Arnaud Le Courtois (Contact Author)

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

Francois Quittard-Pinon

EMLYON Business School ( email )

23, Avenue Guy de Collongue
69134, Ecully
France

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